7 College Savings Options

By Jonathan Sparling

  • March 11, 2022
  • 6 min read


Good news, you have options when saving for college. Your family’s situation doesn’t match anyone else’s, so why should your savings plan? Check out these seven different ways families can save for college. One or more could be the right fit for you.

Start with this quick guide before heading into a breakdown of each option.

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See bottom of page for further explanations in table (*).


1. 529 college savings plans

Let’s start with the most popular option.

Anyone can open a 529 college savings plan. Contributions are after-tax, but funds grow tax-deferred, and withdrawals are tax-free when used to pay for qualified higher education expenses.****

They’re called savings plans, but many 529s are structured like investment accounts. You are required to choose an investment option offered by the plan.

Flexibility matters

Thanks to the flexibility of 529 plans, you can:

  • Direct where you invest the funds (with limitations set by each plan).
  • Change beneficiaries anytime.
  • Use funds for a portion of K-12 expenses and student loan repayment.


2. 529 prepaid tuition plans

These are a lesser-known option under the 529 umbrella.

As the name suggests, prepaid tuition plans allow you to prepay all or part of the tuition and mandatory fees at participating colleges. Like 529 college savings plans, contributions are after-tax, but the increase in value grows tax-deferred. And withdrawals are tax-free when used to pay for qualified higher education expenses.**** Many of these plans have a state residency requirement to participate.

An option for private college

If you’re considering private college, there’s a plan designed to help.

Private College 529 Plan is a prepaid tuition plan specifically created to help families save on the cost of tuition at private colleges and universities across the country. It’s the only plan of its kind owned by colleges, so there’s no residency requirement to save.

How it works:

  • Open an account for your child with as little as $25. The application takes about 15 minutes to complete, and you pay no fees.
  • Contribute between July 1 and June 30 every year to lock in that year’s tuition rate.
  • Enroll at a member college and redeem your prepaid tuition.*****

As yearly tuition rates increase, the value of your prepaid tuition also goes up. And the best part? You don’t need to worry about your investment. No matter how markets perform or how much tuition increases each year, your prepaid tuition is guaranteed by the nearly 300 colleges in the plan.


3. Coverdell education savings accounts (ESAs)

Coverdell ESAs work similarly to 529 plans, with some significant differences. Like 529 plans, contributions are after-tax, the increase in value grows tax-deferred, and withdrawals are tax-free when used to pay for qualified higher education expenses. However, unlike 529 plans, Coverdell ESAs have several unique features:

Account owner income limits

Not all individuals can contribute to Coverdell ESAs. Income phaseouts start at $95,000 for single filers and $190,000 for married couples filing jointly.

Contribution limits

These limits are much lower than 529 plans, capped at $2,000/year per beneficiary.

Age caps

Contributions to Coverdell ESAs must stop when the beneficiary reaches age 18, and funds must be spent by the beneficiary’s 30th birthday. Given these restrictions, it would be best to plan accordingly when spending funds on education expenses.



Unlike 529 plans and Coverdell ESAs, Uniform Gifts to Minor Accounts (UGMAs) and Uniform Transfers to Minor Accounts (UTMAs) are not specific education savings accounts. Instead, these are considered custodial accounts. You control the funds until the beneficiary reaches legal age (typically 18 or 21 depending on the state).

UGMAs/UTMAs do not have any federal or state tax exemptions, and earnings are subject to federal tax each year (typically at the student’s or beneficiary’s tax rate).*  Two other important features of UGMAs and UTMAs are:

Fixed beneficiary

Funds in UGMAs/UTMAs are irrevocable, meaning they must benefit the named beneficiary. For example, the account owner could not change the beneficiary like with a 529 plan.

Financial aid treatment

Since these accounts are considered student (beneficiary) accounts, assets are counted higher in the financial aid formula.


5. Roth IRAs

Roth IRAs have probably popped up in conversations about retirement. But Roth IRAs can also be a powerful college savings option.

You can withdraw contributions you make to your Roth IRA anytime tax and penalty-free. If you withdraw before age 59 ½, the earnings may be subject to tax and an early withdrawal penalty (typically 10%). There are several exceptions to avoid the early withdrawal penalty, and one of them is for education. You’re allowed to withdraw funds from a Roth IRA early for qualified education expenses. Although this enables parents to avoid a withdrawal penalty, you will still pay income tax on the earnings portion of your withdrawal.

What else should I know about Roth IRAs?

Contributions are after-tax and grow tax-free like 529 plans. And annual contribution limits are capped at $6,000 per year or $7,000 for those age 50 and older. Similar to Coverdell, there are income phaseouts starting at $129,000 for single filers and $204,000 for married couples filing jointly.******


6. Investment (brokerage) accounts

Funds from traditional investment (brokerage) accounts can pay for education-related expenses.

Unlike many of the other accounts, brokerage accounts are taxable investments. Earnings and investment gains may be subject to income tax or short or long-term capital gains tax. These tax considerations are important, so make sure you do your research and speak with a financial professional.


7. Traditional checking and savings accounts

A lot of families use money saved in traditional checking and savings accounts for college. Beats stowing away savings under the mattress!

On the plus side, these accounts are low risk and FDIC insured. On the downside, interest rates are historically low, meaning your money will not grow.


Parting advice

Before opening an account, do your research. Remember that most families use multiple college savings options to meet all expenses.

*Generally speaking, UTMA/UGMA accounts may be subject to taxes if the minor earns investment income.  As of 2022, the first $1,150 of income is considered non-taxable.

**Coverdell ESAs are $2,000/year per beneficiary; Roth IRAs are $6,000/year ($7,000 for 50 and older). For 529s, there are no annual contribution limits. However, there are maximum lifetime aggregate limits, which vary depending on the plan. For both 529s and UGMA/UTMA, there are annual limits for gift tax exclusion considerations.

***Considered a parent asset when owned by the parent. Any accounts owned by a student, such as an investment or checking account, is considered a student asset.

****Earnings in 529 plans are not subject to federal tax and, in most cases, not subject to state tax if withdrawals are used for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it for an eligible college expense, it will generally be subject to a 10% federal tax penalty on earnings in the account. For Roth IRA withdrawals, account owners pay income tax on the earnings portion of investments when funds are used for qualified higher education expenses.

*****Tuition certificates must be held for 36 months before redemption. Private College 529 Plan can be used for undergraduate tuition and mandatory fees.

******As of 1.18.2022


U.S. News & World Report. Are Brokerage Accounts Taxed? 

Morningstar. Can I Use a Roth IRA to Pay for College? 

Saving for College. How much can I contribute to a 529 plan in 2022?  

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